Tuesday, 30 December 2014

The Year Ahead: prospects for 2015


We look ahead to the big issues for 2015, following our look back at 2014

The UK economy

The consensus of independent forecasters is that the UK economy will grow by 2.5% in 2015. To put that in perspective, new estimates suggest the economy grew by 2.6% this year - but for whom? In 2014, incomes continued to stagnate, personal debt continued to rise, tax revenues only marginally increased, and the economy continued to be powered by the inherently risky forces of consumer debt and financial services. Expect the same in 2015. Growth yes, a bit slower probably, but no great gains for the many, only the few.

We know of course - and the OBR confirmed it earlier this month - that Osborne's pledge to have net debt falling in 2015/16 will have failed. Austerity has failed to close the deficit and reduce the debt. The same austerity policies will continue to fail in 2015-16, and will continue to have negative consequences in terms of rising inequality, poverty and homelessness.

Wage growth is unlikely to shoot up in 2015, with the OBR predicting only a modest 2.0% rise in 2015. Whether this reflects real wage growth is unclear, and will depend on continued low oil prices keeping inflation low in 2015. Even if marginal real wage growth occurs in 2015, it will do little to unravel the 10% drop in real incomes since 2010. However for public sector workers and those on benefits their income rises will continue to be capped at 1% (likely below inflation).

The May 2015 election should be pivotal (and in the longer term it may be) but for 2015/16 both of the major parties capable of playing a leading role in government are committed to exactly the same spending limits - a level of austerity much greater than in the previous two years. If Osborne again takes up residence at 11 Downing Street then we can expect permanent austerity, however, if it is Mr Balls then in the longer term austerity will be present, but considerably milder (as Ben Chu shows).

But by that time, will austerity policies in 2015/16 have driven us towards recession? It's a serious question with signs of economic slowing at the end of 2014. Can low inflation and debt-based consumer spending come to the rescue? That is the UK economic model for 2015.

Eurozone

The Eurozone enters a pivotal year politically and economically, teed-up nicely by the decision of the Greek Parliament to force new elections. If, as expected, Syriza wins those elections and manages to form a government then the European Union enters a new phase - a member state with an avowedly (i.e. not just nominally) socialist government that does not support the dominant neoliberal paradigm.

The ramificiations across Europe could be huge, especially with elections due in austerity-hit Spain at the end of 2015. If socialist governments are elected and sustained, Europe will become the testing ground for modern socialism. Part of that testing ground will be the reaction - what sort of intervention would such a government face? Will putting the Greek people above creditors (essentially the political divide in Greece) lead to the markets and international financial insitutions, or even foreign governments, trying to destabilise the country?

From a UK perspective how will this play in our internal debate about EU membership? Will parts of Europe turning red encourage UKIP and the Tories to push more strongly for separation, or will an overbearing EU intervening in democratic governments.

On the economic front, would debt restructuring in Greece and possibly Spain mean a hit for UK creditors or affect demand for UK exports?

New year, no change?

Fundamentally though the risks and tensions in the UK and Eurozone economies will persist in 2015. The growth and stability pact imposed on individual countries, and the inertia of the European Central Bank, will mean the continuation of austerity for many and a monetarist framework for those with slightly stronger economies. Whether Greece and Spain can begin to overturn this failed experiment is the big question for 2015 ...

And the same question applies in the UK, but will be left unanswered by both Labour and Conservative governments it seems. Neither party is offering a different economic vision - neither will redistribute income and wealth, or rebalance the economy away from financial services, or offer anything like the vision necessary to build an economy as if people mattered.

The challenge in 2015 will not be the debt, the deficit or public spending levels. It will be about creating the political forces here - as has been done in Greece and Spain - capable of dumping a failed economic model that brings only economic instability, inequality and misery.

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